Opinion / 3 December 2019, 4:30pm / Silindile Ngubo
JOHANNESBURG – January marks the start of both a new year and a fresh and exciting new decade with many more challenges and surprises in store.
So, as we wrap up 2019 and prepare to set off into the roaring 20s, I found myself pausing to reflect on the key financial lessons that life has taught me thus far, offered here for the benefit of others walking their own financial journeys:
The very real danger of debt
One of my hardest lessons has been the importance of getting rid of unnecessary debt and doing your best to repay your debt as quickly as possible.
Growing up, my mother really struggled with her finances, and built up all sorts of debt through store cards and loans. She was simply living beyond her means. Having a child to care for didn’t help, and we eventually ended up losing our family home.
That was the most difficult time of my life, and I vowed from that moment on to always be cautious with debt. To this day, the only loan I have is a home loan, and whenever I incur debt, I always make sure to pay it off as quickly as possible.
Also, many people underestimate just how much money you can save in interest charges by repaying debt more quickly.
For instance, if you have a home loan of R1 million with an interest rate of 10.5 percent and a 20-year term, by only repaying the minimum amount due each month, you would pay the bank a total of nearly R1.4 million in interest charges alone over the 20 years.
If, however, you topped up your repayments by just R500 each month, you would shave nearly three years off your repayment period, and save over R230 000 in interest payments.
And by increasing your loan repayments by R1 000 each month, you could cut your repayment period by nearly five years, and save nearly R390 000 in interest payments, as demonstrated below:
The best defence against wasteful spending
After my son was born in 2017, I spent a great deal of money on unnecessary baby things. I soon realised, however, that creating a budget and sticking to it was my best defence against overspending and impulse buying. Having a clear-cut budget has helped me tremendously, as I now know exactly where my money is going, what my limits are on spending, and where I need to cut back.
Without a budget, it is difficult to monitor your spending, and many South Africans overspend perhaps without even realising it. According to the 2019 Old Mutual Savings and Investment Monitor, for example, 72 percent of the South African households surveyed were unable to consistently make ends meet every month, as their expenses outpaced their incomes.
The best part is that creating a budget is actually very simple. All you need is a pen and paper, or you can also create a spreadsheet on your computer or use one of the many free apps that are available – whatever works best for you.
Your first step, then, is to record all your expenses for one month. Next, group these expenses together, look for any problem areas, and set yourself some spending limits, remembering other financial goals such as saving and investing.
The early bird catches the worm
Before I started working in the financial services industry, the only savings vehicle I was aware of was a stokvel. I am grateful to have been exposed to many more types of savings vehicles since then, and I have been able to pick investments much more suited to me and my individual needs, preferences and goals.
Most importantly, I have learned that it doesn’t matter how small your initial contribution is, but rather that the key to success is to begin saving and investing as early as possible. In my experience, the sooner you begin investing, the more your wealth can grow through capital growth, interest and dividends.
For first-time investors, a good place to start is to consider investing in a tax-free savings account (TFSA). Every person can invest up to a maximum of R33 000 each year (or R2 750 a month), and up to R500 000 over their lifetime in a TFSA without paying a single cent in tax on your investment’s growth and returns. This means that the investments are free of taxes such as Capital Gains Tax, and taxes on the interest and dividends earned, giving my savings a powerful boost over time.
As a parent, I am also investing in a TFSA on behalf of my son. The investment that I have made will count towards his lifetime limit, but by starting his investment for him when he was born, I have given him a 20-year advantage before he would be able to use his own earnings to save.
Give, and you shall receive
Give, and you shall receive. I believe this wholeheartedly, and I have seen this tenet at work in my own life, as well as in the lives of those around me.
There are so many people in our country who do not have the means to see to their own basic human needs, and with the holidays around the corner, this is the perfect time to give back to those who are less fortunate – whether this be the gift of your time through volunteer work, clothes, food or a financial donation.
Those who make financial donations to recognised public benefit organisations (PBO) may also be able to claim a tax deduction, making donating a win-win.
In order to claim a tax deduction, the PBO needs to have received approval from the SA Revenue Service (Sars), and must provide the donor with a Section 18A certificate confirming your donation. A list of approved PBOs is available on the Sars website.
Deductions for donations to PBOs are limited to 10 percent of your taxable income, and not many people can afford to give money. But again, if you don’t have money, you can give in other ways, including the sharing of experiences and investment knowledge to help others get into healthy financial shape for the new decade.
Silindile Ngubo is a fund accountant at Cannon Asset Managers.